How Big Will the Tax Bite Be If You Win the Powerball Jackpot?

Powerball tickets are shown on Saturday in San Lorenzo, California. Ticket sales for the multi-state Powerball lottery soared Saturday as people dreamed of winning the largest jackpot in U.S. history.
Marcio Jose Sanchez / AP

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Jan. 12, 2016, 3:20 PM GMT / Updated Jan. 12, 2016, 3:20 PM GMT

By Kelli B. Grant, CNBC

Sorry, Powerball hopefuls, but there's no way you're walking away with the entire $1.4 billion.

It's not simply an issue of the odds — although the Multi-State Lottery Association puts the chance of winning the grand prize at one in 292.2 million. Or the implications of having to share Wednesday's record-high pot if there are multiple winners.

It's the taxes that'll get you.

Of course, the first hit comes even before taxes kick in. That estimated $1.4 billion prize is only if the winner opts to take the winnings in 30 payments over 29 years. If you want the money now in one lump sum, the jackpot is a mere $868 million, a cut of 38 percent.

Next up is the federal tax bill. Lottery winnings are taxed as ordinary income.

"If they win the jackpot, they're going to be subject to the highest federal tax rate of 39.6 percent," said Melissa Labant, director of tax advocacy for the American Institute of Certified Public Accountants. "It's a lot more significant than folks expect."

Nor are there many workarounds to substantially cut that bill. "You're not the type of consumer the U.S. government is looking to give a tax break to," she said.

The U.S. government automatically withholds 25 percent of such large prizes if the winner is a citizen or resident with a Social Security number. For someone choosing the lump sum, that reduces take-home winnings by $217 million. Residents who don't have a Social Security number, or fail to provide one, will have 28 percent withheld and foreigners, 30 percent.

A customer shows his purchased Powerball tickets at a grocery store in Hialeah, Florida, on Monday.Alan Diaz / AP

Winners will have to pony up the remaining 14.6 percent in federal taxes come tax time in April 2017. That's a bill of roughly $126.7 million you don't want to forget about amid early splurges.

"You definitely need to be planning for cash-flow issues and setting aside that money," Labant said.

So after federal taxes, you'd be left with about $524.3 million. Not bad!

Depending on where you live and where you bought the ticket, state and local income taxes further reduce the winnings. "In New York City, you pay federal, state, county and city taxes," said Susan Bradley, a certified financial planner and founder of the Sudden Money Institute in Palm Beach Gardens, Fla., which helps consumers make the most of such windfalls.

Tallied up, a state and local tax bill could shave as much as another 15 percent —$130.2 million — off the lump sum, she said. That reduces your net winnings to as little as $394.1 million. (Those taxes may not be withheld, so factor that in as another tax bill come due next April.)

The luckiest Powerball winner would be someone who is a resident of Alaska, Florida, New Hampshire, South Dakota, Tennessee, Washington or Wyoming — those states that participate in Powerball but do not have a personal income tax. California and Pennsylvania also exempt lottery winnings from state income tax if you bought the ticket in state, according to lottery information site USAMega.com.

Generosity could result in Powerball winners taking home even less. If you anticipate sharing the prize money, make that agreement before the numbers are drawn (as you would with an office pool), said Labant. Otherwise, the money is a gift rather than income for those recipients, she said — meaning you, the giver, will be the one paying all the income taxes as well as any gift taxes resulting from a substantial split.

Triggering the gift tax is easy to do, with such a big prize. The IRS allows you to gift up to $14,000 per recipient each year, tax-free, with bigger gifts eating away at your lifetime exemption of $5.45 million. (Gifts to a spouse are unlimited.) Exceed that, and the gift tax is a flat 40 percent.

Giving to charity in the year of your win could help. Even if you immediately make a big donation, you'll still have to claim the full prize as income, Bradley said.

The IRS generally allows you to claim donations worth up to 50 percent of your adjusted gross income as a deduction, with excess carried over for up to five years; even donating the maximum deductible amount of $434 million, your federal tax bill next year would still be more than $171.8 million.

Taxpayers can also deduct gambling losses, up to the extent of their winnings that year, as a miscellaneous itemized deduction, Labant explained.

"If you spent a lot buying lottery tickets, and you can document those purchases, you can deduct those losses," she said.

The best way to minimize your tax hit would be to sit down with a tax planner after you win but before you claim the prize money publicly, to figure out a plan based on what you want to do with the money, Bradley said.

"People like the idea of winning, and they don't like the idea of paying the tax," she said. "My general feeling on that is, get a good accountant, pay all the tax and be done with it."

Prior to joining CNBC.com, Grant was the senior consumer reporter for MarketWatch.com and SmartMoney.com. Her work has appeared in The Wall Street Journal, The New York Times, SmartMoney, Kiplinger's Personal Finance, Good Housekeeping, Real Simple and Family Circle, among other publications.